In Germany real estate investors and lenders face refinancing and restructuring situations which are in many ways unprecedented. A vast number of real estate investments set-up around the zenith of the so-called "real estate bubble" usually have a 5-7 year term and will mature within the next 24 months. Often the loan documentation was not drafted to sufficiently cater for a default scenario in general and in particular in Germany. Solutions must be fund while time is pressing.
While German Pfandbriefbanks still lend, new loans remain a scarce commodity and rigid terms are imposed on borrowers especially with regard to equity requirements. If, in addition, the market value of the financed properties plummeted, as is frequently the case, banks will ask for fresh equity.
The lender's problems in practice
Lenders however, increasingly face situations where "healthy" portfolios tumble into a crisis because no refinancing can be agreed due to the investor's unwillingness to inject further money. The commonly used structures of single purpose vehicles support the investors' decision to hand over the keys and walk away from their investment.
Closely related is the phenomenon of leaderless borrowers. Persons appointed as managing directors often take a mere "pro forma" position, more so where professional service providers were used which are not authorised or willing to take any relevant decisions.
Lenders may therefore face the risk that in circumstances where quick decisions are required the situation deteriorates because their borrower is no longer duly managed. The available means are often not sufficient to properly deal with the scenario. In particular lenders cannot replace the borrower's management without running the risk of being regarded as quasi-shareholders. Consequently, lenders are usually bound to enforce their security in a time-consuming and expensive process or push the borrower into insolvency to realise the value of the properties through an insolvency administrator whom they cannot control and who takes part of the proceeds.
The borrower's problems in practice
However, borrowers are not better off.
Following the insolvency of some previously very active lenders, in particular Lehman Brothers as well as a number of northern European banks, borrowers frequently have problems in obtaining the necessary documents to release existing security. This may significantly delay the refinancing of a loan. Due to the tremendous administrative effort involved in winding down a financial institution, administrators tend to have fixed dates on which they execute release and similar documents. Outside these dates it is very difficult to get the necessary documents.
In other cases it is difficult to locate original documentation needed. Namely land charge certificates and enforceable land charge deeds, the originals of which must be produced in a refinancing, were not uncommonly misplaced. While there are statutory procedures available for such cases, they are time and cost intensive. If, as a result, the proposed re-financing fails, the former lender may thus be held liable for damages.
Securitisations and syndications add another layer of complexity. In a syndicated loan borrowers must co-ordinate more than one lender to refinance or restructure their loan. If the loan was securitised, the loan servicer is bound by formal procedures to obtain the internal consents necessary for any workout proposal.
Both lenders and borrowers are currently exposed to challenges in the German market which seem to rebound financial innovations devised during the raise and peak of the "real estate bubble". Parties must, therefore, try to identify problems as early as possible in a restructuring or refinancing process to reduce the need to debate and produce unnecessary documents.